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S&P Hovering Around 10 Year Low

Blogged By: Low Hang Wei @ November 21st, 2008 - 3:53 am

Today, I suddenly had the mood to whip out Yahoo Finance and suddenly decided to generate a chart with the maximum amount of data, which is like close to 60 years. I was just quite curious on how this chart would look at the current moment. Although I personally think that looking at a chart with such a long time frame is not going to be very useful for any kind of investment decision, somehow my fingers just moved by themselves and here is the chart I got. Anyway, as a disclaimer, this posting is intended for fun only and should not be used for any investment decision.

U.S S&P

Noticed that I marked two lines, one showing that the S&P did not manage to break the year 2000 high and the other showing that current S&P levels are around 10 year lows. Technically, I find that looking at such a low time frame is practically useless, since it’s impossible to have empirical data for it. Additionally, even if the stock market existed for thousands of years and we have the data, technical analysis relies partly on human behavior re-enacting in the markets and it’s extremely difficult to conceive the possibility that we are no different from milleniums ago. Then again, history has shown that humans make the same mistakes over and over again, so it may be possible.

Let’s stick to the most basic premise of technical analysis - support and resistance. Support (the grey line) is meant to be a price level where investors will support the price and push it back upwards. Breaking support is bad - very bad. Current candle is long and red - red candles mean bad and very long means very bad. Also, the formation resembles double top formation, which is also very bad, especially since the double top is so symmetrical. Basic technical analysis suggest that everything seems very very bad, the perfect storm.

Let’s look at fundamentals for U.S next.

  • Unemployment claims at 542k, up 27k.
  • PPI m/m down to -2.8% from -0.4%.
  • Most manufacturing indexes down
  • CPI m/m down to -1.0%
  • GDP estimated decrease 0.3% in 3Q2008, compared to 2.8% increase in Q2
  • Third quarter spending fell the most in 28 years

More people jobless leads to less people spending, less people spending leads to more companies busting, more companies busting leads to more people jobless. Wow, I wonder where it ends. That’s not all. Americans are in a hell lot of debt, with their household savings ratio being negative for a couple of years now. To finance their spending, some resort to cards, while others resorted to mortgages. Falling house prices and tighter credit from cards is going to kill their spending. This helps promote the chain as illustrated above and pretty soon, more citizens will be requesting for help from the government.

The government has to save their banks, probably try to save the corporations who are dying due to lack of spending and tightening of credit leading to increased cost of business. Now, they may also have to save their citizens, but can they afford to? Already in debts exceeding 11trillion and having almost 60trillion worth of social security to repay, the government is in serious trouble. People may be confused with this social security debt, I mean isn’t it supposed to be put into a trust fund for future payouts, liken to Singapore’s CPF?

Well… that’s supposed to be the way social security works, but the problem comes when the government is in deficit and constantly ‘borrows’ from this trust. Over time, this trust becomes increasingly used as though it’s part of the national budget. Therefore, the situation currently is taxpayers paying for retirees. When the taxes can no longer support the payout, what happens? Will social security fall? Will hyper inflation be used to ‘rectify’ the problem? Will U.S just borrow more from other countries?

None of those seem to solve the problem at its roots without causing more problems. The only possibility to resolve the problem is to limit the government’s spending and go back into budget surplus. Of course, there can be something else I missed out, but this is what I can think of. However, the thing is that the majority of people in U.S are used to over-spending, including the people in power. Also, the current economic slowdown will probably worsen with a cut in government spending as well.

From what I see, the U.S has quite a lot of deep problems and it doesn’t look like they are going to be resolved fast and painlessly. The only positive factor for them at the moment seems to be the fact that Obama is president and the way he plays out his campaign suggest that he is extremely smart. He may just be the main ingredient to save America, but it won’t be painless. Fundamentally, I would say it’s very weak for now with the potential for more companies to fail and more problems to surface.

The last point I would like to focus on is price action. We have never seen markets moved so fast down with no significant bad news and how a market opening positively with good news reverse so swiftly into negative territory. Typically, financial bear markets last for a period of 1.5 to 3 years, so we probably have to see some more red. All in all, I’m expecting to see the 10-year support line being broken sharply and going to go down much further, probably much more than the 10% more that other people expect.

Of course, that’s just my ranting and it may not be true. I have been very bearish towards the market since December 2007 and it may just be own biased opinions. Afterall, people tend to focus on facts that they believe to be true and for me, I’m still super bearish.

Blogged Under: Personal Finance

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3 Responses to “S&P Hovering Around 10 Year Low”

  1. 1
    Lucky Tan Says:
    November 22nd, 2008 at 6:50 pm

    Hang Wei,

    The reason why the stock market downturn accelerated has more to do with the Lehman collapse than with the state of the economy. Because Lehman was interconnected, its demise caused “black holes” (losses, CDS movements, etc) in the financial world that caused a worldwide liquidation to patch up these losses - EVERYTHING was sold not just stocks. Even gold which is a “safe haven” was sold and all that money moved to Yen or US treasuries - the two things that moved up massively since Lehman.

    The only equivalent I have seen was during the final phase of the Asian crisis when foreign funds DUMPED EVERYTHING to get out of Asia.

    There are 2 possibilities now:

    1. The selloff caused by fear left the economy weak but recoverable. Once people see the system has not collapsed, there will be a reverse move.

    2. The liquidation itself caused massive damage to the real economy cause not just a recession but broke the economy in a way that we have to spend years to put it back together.

    The best analogy I’ve heard is from the experts at PIMCO. The markets had a heart-attack and there is great damage. We don’t know if the economy is dead or can be revived.

    My believe is the resolution of Citigroups problems will trigger some small rally. After that Obama …can he revive it? Buffett’s implicit assumption is the economy will never die….the very assumption that all his value investing devotees depend on. But Buffett is only 76 years old, he has not seen everything. …and there has been nothing like this in 100 years - I checked the data on the depression, there is no period with the type of uncertainty we have seen in the market (up 5% in one day, down 6% the next day, up 6%..and so on). There were no derivatives in 1929, no CDS, etc. So we are in unknown and unprecedented territory.

    You’re are lucky to be young. All this will be left far behind you as you grow oldeer. For middle aged men still supporting their families and paying for their homes, this is absolutely horrifying. Regardless of what direction the stock market takes, we will see a severe recession - even Buffett accepts that will come and had to discount for it. Many lives will be disrupted….some shattered in the coming months.

    Hang Wei says:
    “Even gold which is a “safe haven” was sold and all that money moved to Yen or US treasuries - the two things that moved up massively since Lehman.” For Yen, the money movement was mainly to offset carry trades positions, but for U.S, it was a flight to safety measure and this is my main concern. At the current moment, a lot of currency is in USD and that means a lot of potential for it to reverse if things go wrong. What if countries start pulling out their funds from U.S and leading to strong momentum in that direction?

    It could be potentially dangerous for the U.S economy on several counts: the psychological effect and the inability of U.S government to get funding to repair the economy. At the moment, they are in deep budget deficit and it is unlikely that they can reverse that anytime soon in the state of the economy. We also have to note that the baby boomers are starting to receive their social security payout and since the social security trust had been used for other purposes, their promises have to be settled by adding to the budget deficit. This means that they need money and it is unthinkable what may happen if they can’t get it. Hyper-inflation? Default? Who knows?

    I agree with you totally on the aspect of Lehman contributing significantly to the stock market downturn. However, I believe that even without the Lehman disaster, U.S has plenty of problems by themselves: consumer debts, government debts and company debts. Everybody borrows or lends aggressively and this is the inevitable problem of aggressiveness that had helped them grown so fast. It was simply waiting for the catalyst to create a perfect storm. I’m eager to see how their government can repay these monstrous sums of debts, how their companies can deal with current cash flow problems because they have been expanding without contingency plans and how their consumers can deal with their personal debts in the face of the weakening economy and loss of jobs.

    I also agree with you that we are in uncharted territories and simply that uncertainty will contribute further to the stock market downturn. Afterall, the current trend is if you’re unsure, simply sell first and ask questions later. Even those long-term investors may start to freak out and dump their holdings in the face of such uncertainty or when they need the money for their current needs. While financial markets used to be driven by economy, the reverse has also been true in the past few years, so the economy may take a big hit.

    On the other hand, I believe that the economy will recover eventually. I just don’t see the end yet, not in the next few months anyway.

  2. 2
    qwerty Says:
    November 27th, 2008 at 7:07 am

    Lucky Tan said:
    “Buffett’s implicit assumption is the economy will never die….the very assumption that all his value investing devotees depend on”

    Actually, there is also another approach to value investing which doesn’t strictly depend on the stock price recovering. There are companies out there who are worth more “dead than alive”. The book value is greater than the stock price. And liquidating the company would actually reap a profit for the investor.

    That said I would rather be buying bonds from these companies rather than stock because of the guaranteed yield.

    Hang Wei says:
    Just be careful here. Even if the book value is higher than stock price, it doesn’t mean that it’s worth more dead than alive. When it’s being liquidated, the assets are being sold at discounted market value, which may or may not be substantially lower than book value, depending on the company’s accounting policy.

  3. 3
    qwerty Says:
    November 28th, 2008 at 8:47 am

    Of course you have to look at the type of assets available in the financial statements. This kind of boring like an accountant’s job which is why most people don’t even bother doing so when they invest and lose money.

    Plus another way to minimise losses is to have a huge margin of safety.

    For example, I found a company which has its own investment portfolio worth $20 per share diversified across all industries.

    But it is selling for $4 per share because they stop their dividend to conserve cash.

    Rather than reward them for financial prudence, the market punished them in their stock price.

    However, their portfolio of companies is still churning out profit and there have been lots of insider buying. You see a lots of examples like that because of the current situation.

    Of course you are right, one can’t be too greedy. But I dare say it is safer to value invest now than one year ago because the companies’ fundamentals are more exposed and open for all to see.

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